What is FX volatility? Time zones and currency pairs (3 selected indicators)
Many people are interested in understanding how different time zones affect the volatility of currency prices and how to develop trading strategies that take advantage of this. understanding market fluctuations and volatility is essential when trading in the forex market.
This article will unpack the nature of volatility in the forex market and explain the movements of currency pairs at different times of the day. We will also introduce you to currency pairs with high volatility. In addition, we will detail three effective indicators for analyzing volatility.
This article will help you understand the characteristics of the market during different time periods and optimize the timing of your trades. In addition, understanding the factors that cause volatility will help you develop a trading strategy that minimizes risk. Furthermore, by utilizing the indicators we will introduce, you will be able to accurately predict market fluctuations and increase the probability of successful trades.
In forex trading, a combination of knowledge and strategy is the key to success. Through this article, you will gain more knowledge, gain practical tools, and trade with more confidence.
First, we will explain FX volatility.
What is FX volatility?
To understand the characteristics of the FX market, it is essential to understand the concept of "FX volatility". This section details what forex volatility means and why it is important to traders.
In a nutshell, volatility in the FX market is an indicator of the degree of fluctuation in currency prices. In other words, it indicates how rough or calm the market is. When there is significant price volatility, there are both opportunities and risks for traders. Let's take a look at how it works and its importance.
How FX Volatility Works
Volatility in the foreign exchange market is caused by a wide variety of factors. The following are the main factors
・Increase in transaction volume by time of day
・Release of economic indicators and statements by key figures
・Movement of actual demand such as middle market price and London Fix
・Rising geopolitical risks
Volatility is known to increase during the hours around the start of the London market. This is because European traders, who are the center of currency trading, join the market, causing trading volume to rise.
Volatility also increases immediately after the release of high-profile economic indicators and statements by key figures. Every day around the 10:00 a.m. Japan time middle price and the London Fix at midnight also increase volatility and provide trading opportunities.
Understanding the factors and characteristics that increase volatility and the movement of each stock will increase your trading opportunities.
The Importance of FX Volatility
Volatility is a source of great opportunity and risk for forex traders.
Opportunity
Immediately following the release of economic indicators and statements by key figures, market fundamentals are more likely to be fixed, and clear trends are more likely to occur.
For example, when the U.S.-Japan interest rate differential is the focus of attention, the results of the U.S. FOMC meeting or the U.S. Consumer Price Index will determine the trend direction of the foreign exchange market. When such clear directions emerge, opportunities for large gains in a short period of time may increase.
Risk
On the other hand, immediately after the release of an economic indicator, the spread may open up and weaken execution. This creates the risk that orders may be executed at a price less favorable than the expected price or that orders may be difficult to execute.
Also, because of the rapidity of market movements, the possibility of large unintended losses increases. Specifically, if the results of economic indicators differ from market expectations, or if the spread widens, there is an increased risk of being trapped by the stop loss you have set.
As traders, we need to fully understand the advantages and disadvantages of such volatility in order to develop a strategy.
FX Volatility and Optimal Time of Day
Proper timing is essential for success in forex trading. To this end, understanding "forex volatility" and "optimal time of day" is essential. In this section, we will explore in detail the relationship between volatility and which time of day you should trade.
In fact, volatility varies with the time of day. Although the market operates 24 hours a day, currency price fluctuations vary widely depending on the time of day. This section details which times of the day are associated with higher volatility and, conversely, when it is lower.
Oceania Time
Oceania time falls in the early morning hours of Japan time. During this time period, trading is focused on the Australian dollar and NZ dollar currency pairs, known as Oceania currencies.
Of particular note is the fact that economic indicators for many Oceania countries are released in the early morning hours of Japan time. The release of these economic indicators can cause volatility to rise. In addition, news during the weekend can be a factor and open a window of opportunity.
Tokyo time
Tokyo time falls in the morning of Japan time. The 10:00 a.m. middle price in particular attracts a great deal of attention, which leads to an increase in volatility, especially for the dollar-yen.
Specifically, short-term trends often form between 9:30 and 10:00 AM. Furthermore, because trading takes place after New York time, the market tends to be more susceptible to such trends and influences. Trends in the Tokyo market, the center of the Asian market, often influence subsequent trading.
London time
London time is in the evening and nighttime Japan time. Volatility tends to increase especially between 3:00 p.m. and 4:00 p.m. Japan time, just before and after the start of the London market.
The overlap with New York time is also the most active trading time of the 24-hour period. Volatility also tends to increase around the London Fix at midnight, especially in the gold market, the pound dollar, and the euro dollar.
New York Time
New York time is from night to midnight Japan time. This is also the time when information that has a large impact on the market, such as the release of major U.S. economic indicators, FOMC meetings, and statements by key figures, is often announced. The overlap with the London market from 9:00 p.m. to 1:00 a.m. Japan time is a time when trading is active and many economic indicators are released.
Since there is also a U.S. stock market, volatility increases during the time period corresponding to the morning hours in New York.
When economic indicators are released
The release of economic indicators often has a significant impact on FX market volatility. Market reactions can be particularly intense when major indicators such as employment statistics or central bank interest rate decisions are announced. At such times, it is important to check the date, time, and expected value of the announcement in advance and plan your strategy accordingly.
When an important person speaks
Statements and comments by key figures can have an instantaneous impact on the exchange rate. In particular, statements by central bank leaders and finance ministers can significantly change the direction of the market. The content and tone of statements often cause market participants' expectations and forecasts to fluctuate, leading to major movements in the exchange rate.
Currency pairs with high FX volatility
Choosing the right currency pair is essential to success in the forex market. In particular, currency pairs with high volatility often represent opportunities for traders. This section focuses on currency pairs with high forex volatility and discusses their characteristics and cautions.
British pound sterling/yen (GBP/JPY)
The Pound Sterling is known for its high volatility. Trends in both countries, such as economic indicators and political factors in the United Kingdom and economic conditions in Japan, greatly affect the price of the currency pair.
The average daily moving range for the most recent pound sterling was 1.35 yen (135 pips). The dollar was about 1 yen (100 pips), which means 1.3 times the volatility. Sudden, sharp drops can occur, and speculative movements tend to be strong.
In 2022, a plunge of 15 yen (1500 pips) occurred in just four days. In addition to this, volatility tends to spike when there are important events, and easy contrarian moves are very risky.
Important point
The high volatility of the Pound Sterling Yen provides many opportunities for profit, but also increases the risk of incurring large losses. Therefore, adequate risk management is required. Specifically, it will be necessary to take measures such as reducing the amount of positions compared to other currency pairs. Particular attention should be paid to sudden news related to the United Kingdom.
Turkish Lira/Yen (TRY/JPY)
The Turkish Lira is known as a very volatile currency pair, mainly due to the fluctuation of the lira, an emerging market currency. In particular, policy changes by Turkey's central bank and the release of economic indicators can cause significant movements in the pair's price. Because of the instability in Turkey, the central bank tends to follow the government's wishes, which can be unpredictable, for example, by adopting monetary policy contrary to market expectations.
The Turkish lira yen is a well-known currency pair for swap trading due to its high volatility, but also because of its high swap rates.
Important point
As an emerging market currency, the lira is more volatile than other major currencies and therefore carries more risk. Information gathering and risk management are essential, as significant price fluctuations can easily be triggered by political news or changes in economic policy in Turkey.
South African Rand/Yen (ZAR/JPY)
The combination of the South African rand and the Japanese yen is also a highly volatile currency pair as a result of the volatility of the rand, an emerging market currency, combined with the stability of the yen. The economic situation in South Africa, especially news about mining and natural resources, as well as the interest rate policy of the central bank, have a significant impact on the pair's price movements.
It is well known as a currency pair that grants many swap points, and many people trade for swap purposes by holding long-term positions.
Important point
Since the rand is also a resource-based currency, it is strongly affected by resource price fluctuations and mining-related news. While there are great profit opportunities, there is also the risk of sudden price fluctuations, so adequate information gathering and risk countermeasures are necessary.
Gold (XAU/USD)
Gold is known as an asset that attracts attention during times of economic uncertainty and increased risk aversion. Gold price volatility is influenced by factors as diverse as central bank policy and geopolitical risk. By capturing the movements in the price of gold during periods of heightened volatility, it is possible to pursue profitable investments.
Gold is a CFD stock that is very volatile. In particular, it fluctuates greatly with news about U.S. policy rates.
Crude oil (XTI/USD)
Crude oil is used as the centerpiece of the energy market and as an indicator of the health of the global economy; OPEC production adjustments and geopolitical events are major factors causing oil price volatility.
Crude oil prices rise significantly when people are aware of the relationship between supply and demand, and when production continues to be cut despite rising demand. Reports of production adjustments by oil-producing countries, geopolitical risk, and demand and supply news can greatly increase volatility.
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Forex Volatility Indicator
We have introduced you to the currency pairs with high volatility and the best time frames, but how can you analyze volatility? This is where the Forex Volatility Indicator can be utilized. In this section, we will explain in detail what indicators are and why they are useful for analyzing volatility. We will also introduce specific indicators.
First, let's get a better understanding of the forex volatility indicator.
What is the Forex Volatility Indicator?
The Forex Volatility Indicator is an analytical tool used to measure the magnitude of price fluctuations and the intensity of movements in a currency pair. This can help traders predict market volatility and the likelihood of future price fluctuations.
By using these indicators, it is possible to create a more precise trading strategy. The following sections describe in detail the specific types of indicators and how they can be used.
Bollinger bands
Bollinger bands are indicators that form bands based on the standard deviation of prices. The center line shows the moving average, and the upper and lower bands show its standard deviation. When prices move outside the bands, it may indicate abnormal volatility.
The widening of the Bollinger Bands provides a visual confirmation of increased volatility.
Bollinger Bands are used by many traders because they allow them to predict future ranges of fluctuation based on past price changes.
ATR (Average True Range)
ATR is an indicator that shows the difference between the highest and lowest prices within a specific time period. A high ATR indicates high volatility and a low ATR indicates low volatility. Traders can use this as a reference when determining entry and stop loss positions.
In particular, ATR is effective when used in combination with other indicators because it shows market volatility in tangible numbers.
HV (Historical Volatility)
HV is an indicator of volatility based on historical price data. It displays price fluctuations over a specific period of time as a percentage, based on which it evaluates the magnitude of future fluctuations and risk. Because it is an indicator based on historical data, it is not a perfect predictor of the future, but it is very valuable as reference data based on past movements.
Leveraging FX Volatility with ThreeTrader
ThreeTrader is a forex broker with unique features and services to help traders succeed. In particular, ThreeTrader's tight spreads and reward point program are very attractive for taking advantage of forex volatility.
Advantages of ThreeTrader's narrow spreads
ThreeTrader offers narrower spreads than many other brokers. This keeps transaction costs low and is ideal for trading over short periods of time, especially for scalping. Even in the highly volatile Pound Sterling and Gold, ThreeTrader maintains spreads that are significantly more favorable than those of other brokers. This allows you to effectively take advantage of violent market movements and pursue more profit.
How to use ThreeTrader points
Each time you make a trade, you earn ThreeTrader points. These points can be redeemed for cash back or items. In addition, this reward points program encourages frequent trading and helps build long-term trading relationships.
ThreeTrader accounts can be opened in as little as one day
Opening an account with ThreeTrader is easy and fast. It is very attractive that you can start trading as soon as the required documents are submitted on the same day. ThreeTrader also offers a solid support system, so both beginners and experienced traders can start trading with peace of mind.
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Summary｜Volatility in FX
In this article, we explained how forex volatility works, the best times of the day, and currency pairs with high volatility. We also introduced indicators to analyze volatility.
We hope you now understand how important knowledge of volatility is for proper timing trades and risk management.
By utilizing the knowledge of volatility and the indicators conveyed in the article, you can develop a trading strategy that minimizes risk. Use the knowledge you have learned to accurately predict market volatility and increase your probability of trading success.
